The most compelling argument for the Detroit Three bailout is not that North America must always have a certain number of people working in the auto sector. Our economic history is one of industries that start from nothing, grow, and then are displaced (if not replaced) by even newer industries. There's nothing special about the auto industry that cries out for a minimum level of employment and output that must be enforced for all time. What we're worried about is a sudden disintegration.
But just how severe would be a sudden failure of the Detroit Three on labour markets? It's perhaps a commonplace to note that jobs are continually being destroyed and created, but I don't think that the scale of this phenomenon is sufficiently well known.
Here is a graph of hires and separations (quits + layoffs) in Canada between 1988 and 2006. The data are not seasonally adjusted and pretty noisy, so they are expressed as 12-month moving averages. They stop at the end of 2006, because they were very kindly passed onto me by Stephen Tapp (now at the Parliamentary Budget Office) for this post; updating them would cost me time and money.
The thing to take from this graph is the scale of the vertical axis. The most credible worst-case scenario of a collapse of the Detroit Three involve job losses of the order of 150k. (The estimate of 500k from the Ontario Manufacturing Council that made so many headlines is not credible.) Losing 150,000 jobs is certainly not good news, but in the context of an economy in which almost a quarter of a million jobs are lost every month, it's fair to wonder just how big of a deal that is. If those losses were spread across a few months, they would hardly show up in that graph.
In the US, the Bureau of Labor Statistics has data from 2001 that are publicly available over here, and it also provides a breakdown for how separations are divided between quits and layoffs:
Even after applying the rule of ten, the gross job flows from the US payroll survey are twice as large as those in Canada. I don't know if that is due to differences in survey methodology, or if the US labour market really is that much more dynamic. But it's pretty clear that the gross job flows are an order of magnitude greater than the net flows that make the headlines each month.
It's also interesting to see just how stable the flow of layoffs has been. It's not hard to imagine why hires and quits would be pro-cyclical, but it's surprising to see that the flow of layoffs (at least in this short sample) does not appear to be much affected by the business cycle.
In the US, the predicted employment losses associated with a collapse of the Detroit Three are in the range of 2m. Once again, if they were spread over a number of months, they wouldn't show up on that graph.
I don't want to be misunderstood here: notwithstanding these considerations, the short-term consequences of an immediate, catastrophic collapse are severe enough to justify spending public money in order to prevent it. Hiring rates are not yet strong enough to absorb that kind of shock.
But if the shock is spread out over a long enough period of time, they will be.
I would guess one of the reasons the US job market is much more dynamic than the Canadian one is explained by differences in labor laws in the two countries. Many states in the US have at-will employment, lower unionization rates, lower minimum wages and health care coverage is far from automatic. For a worker in a substandard (non-union, low wage, no benefits and sometimes hazardous) position, the incentive to find a job with a better wage and benefits is very high.
Some demographic factors are also in play: the population is younger, the illegal immigration problem is much more acute, and the birth rate is higher in the US.
Posted by: ClaudeB | December 24, 2008 at 12:51 AM
That spike of hires and fires in 2002 is when I discovered doing manual labour in a warmer winter city meant the only employers that would hire workers with a sketchy work history were sketchy temp agencies.
State budgets are mandated to balance and Harper has frozen transfers payments to provinces (IDK for how many years/decades). If the choice is to fund SUV manufacturing or to fund hospital premature baby incubator wards, I know what I'd choose. Seriously, retrain them as nurses and nursing home contruction workers and carpenters. Give the money to Bombardier, Zenn and MDS instead.
Posted by: Phillip Huggan | December 24, 2008 at 02:31 AM
Can you estimate the number of jobs that will be lost because of the consumption that will be foregone due to the $4 billion having being taken out of the economy in order to give it to the car companies?
Posted by: Adam | December 24, 2008 at 08:04 AM
I agree with the public interest in preventing more catastrophic factor market structural adjustments in the near future.
There are additional reasons for directing public support to the auto sector.
The auto sector exhibits significant sunk costs in terms of equipment, labour, component and consumer service networks.
Instead of 'profit-shifting' a la Brander and Spence, public support in Canada will prevent 'profit evaporation'.
Compared to other stressed sectors such as forestry, the auto sector has despite public support managed to shed and readjust capacity relatively quickly over the years. These bail-outs will not prevent the on-going rationalization of the Detroit 3.
The auto sector is a critical component of the NA Defence Industrial Base. A slower and more orderly rationalization would be in the interests of national and continental security.
Posted by: westslope | December 24, 2008 at 04:26 PM
I remember going to a swearing in ceremony for new engineers in the Cambridge area, about a decade ago. Each of the new engineers gave a little speech mentioning their current employment and, having grown up in a more eastern part of Ontario, I was struck by how many were directly or indirectly involved in the auto industry, all but two or three out of group of 30 or more if I recall correctly.
Auto industry woes have already made Windsor an outlier in national housing price statistics, and although I have only gut feel and anecdote to back it up, I suspect that a sudden failure of the big three (i.e. if they were to stop all operation and close all plants, and all their suppliers went bankrupt, and all the marginal businesses that depend on revenue from auto workers to stay afloat went under) would have effects far beyond the impression your post gives, although I agree with your conclusion that, spread out over a long enough period of time, the closure would be more manageable.
Posted by: Declan | December 26, 2008 at 01:44 AM
Here's an excellent example of what I've been trying ineptly to say:
http://economistsview.typepad.com/economistsview/2008/12/an-eisenhower-m.html#trackback
Quote:
...Eisenhower's interstates are an essential part of our culture. ... In 1956, Eisenhower likely didn't fully realize that he was creating not just a public works program but an economic and social blueprint for the next 50 years..."
The world, needless to say, cannot repeat this elsewhere and least of all in North America. There is again a need for a comprehensive rewrite of both the industrial and technological basis for modernity.
Posted by: sustain_ability | December 26, 2008 at 11:38 AM
Exchanging auto plants for nursing homes does not sound feasible. Labor adds more value to the product in agricultural and industrial production than in nursing home service. It is productivity in those sectors that permits the existence of nursing homes and preemie units. Developing countries cannot develop by building hospitals and nursing homes first.
Posted by: mrrunangun | December 26, 2008 at 03:33 PM
Well you could just let boomers dehydrate to death in a pool of their own feces in the back of a Canadian-made Chevy Impala. Given the boomers lack of voting in Universal Daycare or an environment platform, it wouldn't be an unjust outcome...
Posted by: Phillip Huggan | December 29, 2008 at 02:42 PM
Just-in-time inventory management is another one of the modern wrinkles at play behind the push for public bail-outs of the auto sector.
Apparently, Toyoto may modify practices to ease burdens on suppliers:
Posted by: westslope | December 30, 2008 at 05:22 PM
Here is the link: http://www.bloomberg.com/apps/news?pid=20601109&sid=a67TdTDZscbQ&refer=home
My attempt at standard html code was unsuccessful.
Posted by: westslope | December 30, 2008 at 05:23 PM
Dear Blog Owner,
My name is Irene, and I work with the website Real Hospital Jobs:
http://www.realhospitaljobs.com
I recently found your site and am very interested in exchanging links.
As you know, reciprocal linking benefits both of us. Please post a
link to my site as follows:
Title: Hospital Jobs
URL:http://www.realhospitaljobs.com
Description: Search Hospital related jobs from nursing jobs to physicanjobs.
Once you've posted the link, let me know the URL of the page that it's on, and I will post it on our site.
Thank you very much,
Irene
realhospitaljobs@gmail.com
Posted by: Irene | February 01, 2009 at 03:35 PM